Posted January 19, 2015 Niroshan Satkunalingam
On the 15th of January 2015, the Swiss National Bank shocked the world by removing its euro exchange rate peg causing one of the biggest shake ups in foreign exchange history. Introduced during the debt crisis in 2011 to promote stability, the SNB would buy euros and other currencies to prevent the strengthening of the Swiss franc. This reduction in exchange rate volatility would assist exporters in Switzerland with financial planning and international competitiveness when operating with more than one currency.
However with the SNB continuing to throw money at buying up the euro was an unsustainable policy unless short-term interest rates were pushed further into negative territory. Furthermore there is the possibility of the ECB entering a new phase in quantitative easing which will introduce downward pressure on the euro resulting in a boost in the franc. Therefore the SNB would be required to work harder to stop the Swiss franc appreciating and simply acknowledged the obvious before the franc was overrun.
The abrupt move has caught out traders who had expected the SNB to maintain its pillar of stability with the vice president Pean-Pierre Danthine stating on the 12th of January 2015 that the cap would remain in place. The surprise move caused the euro to fall 30% against the franc due to its ability to move freely for the first time since September 2011. Therefore anyone holding Swiss francs will have become relatively wealthier. But people from neighbouring countries who have mortgages and hold debts in Swiss francs will have to use a larger proportion of their disposable income to pay these off. Shares in many major Swiss banks took a hit due to the removal of the national banks currency intervention i.e. Shares of Credit Suisse tumbled 11%. Furthermore the rapidly strengthening Swiss franc will mean that the products of exporters will be more expensive to foreign countries reducing international competitiveness of Swiss firms. This was clearly seen in watchmaker Swatchs’ share prices which fell by 11%. Suddenly Swiss watches and holidays have become more expensive.